Confidence in the government's commitment to a green energy agenda was dealt another major blow on Friday when an £860m scheme to subsidise renewable heating systems was pulled at the last minute.

The Department of Energy and Climate Change insisted that its groundbreaking Renewable Heat Incentive was being delayed rather than abandoned, and blamed the European commission for failing to give it the immediate go-ahead. But the industry described the news as "desperately disappointing" and was angry that the final decision from DECC came just hours before the RHI was meant to come into force.

"The industry has been gearing up over the last six months to deliver on the government's ambitious plans for renewable heat," said Paul Thompson, head of policy at the Renewable Energy Association (REA). "This further adds to low confidence levels in the renewables industry as a whole, added to uncertainty around the feed-in tariffs, the renewables obligation and the renewable transport fuel obligation."

William Worsley, president of the Country Land and Business Association, said farmers and others would be out of pocket as a result of the DECC's decision.

"Many members have been gearing up to launch projects … while others have already taken the plunge and will face cash flow problems as a direct result of the commission's intervention," he said. "The announcement for RHI funding was made in the comprehensive spending review last October, so the UK government should have ironed out the wrinkles well in advance of the launch date."

DECC officials said that the European Commission's concern had been that the RHI's tariff for large biomass had been set too high, and argued that they had tried to find ways of keeping to the original timetable.

"We understand that the commission has given state aid approval for the RHI, subject to a reduction in the large biomass tariff, and we expect to receive written confirmation of this very soon," a statement from the department said. Changing the heat tariff from its current planned level of 2.7p per kilowatt hour would require the RHI regulations to be amended and submitted to parliament for approval.

"Once we have received written confirmation from the commission, we will make a further announcement about what this means for the large biomass tariff and the timing of the launch. We are committed to launching the scheme as soon as possible to minimise disruption to stakeholders," it added.

In March, the government announced the details of the RHI, saying it would "revolutionise" the way heat is generated and used. It boasted at the time it was the first financial support scheme for renewable heat of its kind in the world.

Department officials have told the industry that it hopes to be back up and running in around two months' time with a new subsidy scheme, but the REA said any postponement would cause significant disruption.

"As heat demand is seasonal, delaying until the end of November will mean many customers will either put off a decision until next winter or buy a new fossil fuel boiler now – locking them in to higher-carbon heat for years to come," explained Thompson.

The frustration is intensified by a series of other changes or delays involving the renewable heat and energy agenda, despite the government saying in the run-up to the elections that it would be the greenest yet. Ministers have failed to give a firm date on when a review of the renewable obligation subsidy regime would start, causing uncertainty in the biomass and other green business sectors. Solar companies were angry earlier this year when DECC unveiled plans to review the feed-in tariff next April.

There has also been speculation that the full launch of the government's Green Investment Bank could also be delayed as a result of EU state aid rules, according to the BusinessGreen website.